Baltimore Mayor Fights Bank Scheme

A lawsuit aims to fix the harm a bogus interest rate has had on Charm City's finances.

(Continued from Page 1)

However, other would-be plaintiffs have given ballpark estimates. According to one report, New York's Nassau County estimates that it is out $13 million from swaps related to $600 million in outstanding bonds. By comparison, Baltimore reportedly held $550 million in bonds based on Libor interest rates in 2008.

The Libor rate is set daily by a panel of banks coalesced as the British Bankers' Association. Libor is theoretically the interest rate that a bank would charge to lend money to another bank for three months (though such loans almost never occur nowadays).

It affects cities like Baltimore when they issue bonds to raise money for infrastructure projects. Investors are offered a floating interest rate -- the Libor rate and an additional percentage.

To protect themselves from the sometimes radical ups and downs of market fluctuations, though, tightly budgeted municipalities contract with banks, agreeing to pay a fixed rate in exchange for which the bank pays the floating rate to the city's investors. That's an interest rate swap.

If the interest rate fluctuates upward, the city makes a profit. If it fluctuates downward, the city begins to lose money. In the case involving Baltimore and the banks from which it bought interest swaps, the rate was allegedly manipulated downward by bank rate setters.

"They [the city] are not getting the interest they bargained for," says William Carmody, a lead outside attorney representing the plaintiffs. "If they're getting a certain number that's tied to Libor and Libor is understated, they're not getting all the money they should." He says that such rate manipulation is a violation of the Sherman Anti-Trust Act.

The defendants in the lawsuit have declined to talk about the case, though they have moved to have it dismissed on the grounds that, among other things, Libor fluctuations cut both ways, with no clear beneficiary or victim of an alleged rate manipulation. Thus, while interest-swap holders may be hurt by a lower rate, the rate could theoretically benefit holders of adjustable rate mortgages.

Nilson says that the class-action suit has been in the works for about a year. "We had initial information about what appeared to be occurring [with interest rate manipulations], and we determined that the city had utilized the interest swaps during that period between 2006 and 2009," Nilson says. "Then we authorized outside counsel to pursue a class-action suit."

The administration of Mayor Rawlings-Blake seems to have been beset by troubles since she took office two-and-a-half years ago. She was the City Council president when Mayor Sheila Dixon resigned as part of a plea agreement to settle charges of perjury and embezzlement and, as such, became the new mayor.

During her first week in office, Baltimore was struck with two devastating winter storms, dumping 4 feet of snow on the city. There were subsequent record heat waves, flooding and a tornado that destroyed homes. To wrangle her first budget as mayor in 2010, she had to close a $121 million gap, the largest in decades.